Challenging Cross-border Acquisition

CHALLENGE

In mid-2020, our clients—a group of US and HK sellers—were approached by a promising buyer from mainland China who wanted to acquire their majority interests in a Hong Kong-based wet wipes business with a manufacturing facility in mainland China. The deal was challenging for a number of reasons:  

First, the parties wanted to carve out the land and premises where the manufacturing was conducted in mainland China from the target group. The buyer intended to move the production base to its home city in the near future, and our client wanted to keep the land as a long-term investment. Inevitably, our clients needed a restructuring plan that was not only time efficient, but also tax efficient.  

Second, as the transfer was meant to be conducted at the Hong Kong holding company level and our clients preferred to receive consideration in USD, the structure of the transaction also needed to be designed in a way to fulfill the stringent compliance requirements imposed by the Chinese regulators on remittance of funds offshore and to protect our clients’ interests to receive deposit onshore.  

Third, the buyer wished to keep cooperating with our clients after the acquisition was completed, including retaining one of our clients (a Hong Kong-based individual) as business consultant and the other client (a top-tier US distributor) as exclusive sales agent in certain jurisdictions.  

SOLUTION

As a result of these challenges, the transactional documents were quite lengthy, including shareholders agreement, consultancy services agreement, business cooperation agreement, and intellectual property license agreement, most of which involved multijurisdictional issues across mainland China, Hong Kong, and the US. 

Our Hong Kong M&A team’s deep understanding of China-related legal and tax matters and seasoned experience in cross-border project management were critical to helping our clients work through the various issues at hand. In this deal, tax considerations played a key role in envisaging the structure of the transaction. By deploying our knowledge in mainland China and Hong Kong tax laws and practices, we flagged the potential taxation risks in the transaction structure proposed by the buyer and helped our clients save millions of RMB with an improved structure.  

Further, thanks to our multiqualified lawyer team and one-stop international platform, we were on top of all the issues emerging from or likely to affect the transaction, ranging from US sanctions and FCPA compliance issues, Force Majeure concerns in the context of COVID-19, minority shareholders’ protection under Hong Kong law, etc.

RESULT

From start to finish, we worked side by side with our clients and their Chinese and US advisers to lead the deal to its successful outcome. The transaction was closed in January 2021, with the valuation of the target group at more than US$40 million. Our clients and the buyer plan to embark upon a new business collaboration, following the completion of the restructuring and the sale.